Stonecipher Post-Mortem: Powerful Boards, And HR’s Role

Boeing’s decision last week to sack CEO Harry Stonecipher after it learned about his relationship with a female executive raises a host of critical governance questions, and underscores how personnel policies are set—and resolved—at large public corporations.

Stonecipher

Boeing said its board ordered an investigation after receiving information that was sent anonymously to board chairman Lew Platt and the company's legal and ethics leaders, according to the announcement at the time. Platt said Stonecipher was fired because the board determined the actions were inconsistent with Boeing's code of conduct, and that the facts “would impair his ability to lead the company."

"The CEO must set the standard for unimpeachable professional and personal behavior, and the board determined that this was the right and necessary decision under the circumstances," he said in a statement at the time.

Seeping Into Peoples’ Lives

At the surface, the Stonecipher incident does not appear to be related to issues of corporate governance. “The reason for his dismissal is not governance related,” asserts Paul Hodgson of the Corporate Library.

However, Hodgson says the mere fact that Stonecipher was dismissed for the reasons provided suggests that governance concerns were probably raised, and are indeed spreading into areas that they didn’t inhabit in the past.

In fact, Stonecipher’s swift firing underscores how corporate boards of directors feel more empowered in the post-Sarbanes era. “Boards now feel they can take more direct action,” Hodgson argues. “In the past they would have tried to cover it up and looked ridiculous.”

In fact, the rate of CEO dismissals in general has increased by 170 percent from 1995 to 2003, according to the third annual survey of CEO turnover at the world's 2,500 largest publicly traded corporations by Booz Allen Hamilton.

Of course, lawyers and others among the governance set who get paid by corporations are reluctant to believe that Stonecipher’s sacking could be a governance issue. “I would hope it’s not,” says Morton Pierce, of Dewey Ballantine, who is openly irked by many recent governance rules that have been put into effect, and is a staunch opponent to issues like proxy access. ”Then governance would get into broad areas of people’s lives.”

No Explicit Ban

Pierce asserts that the Stonecipher incident relates to governance only inasmuch as it highlights the necessity for companies to have—and enforce—a code of business conduct.

Many companies include in their code of conduct a description of the types of "personal relationships" that are considered inappropriate or potentially troublesome. Some of those companies actually require that employees disclose those relationships to the human resources department, adding that the nature of the relationships will be kept confidential. In most cases, mentions of inappropriate personal relationships are included in sections of the codes that deal with conflicts of interest (excerpts from some of those codes can be found in the box above, right).

“Some codes are more explicit, some are less,” says Pierce. “Companies must be comfortable with their codes of conflict.”

In Boeing’s case, its “Ethical Business Conduct” document published on its Web site states, “Employees will not engage in conduct or activity that may raise questions as to the company’s honesty, impartiality, reputation or otherwise cause embarrassment to the company.”

But, there is nothing explicitly barring consensual relationships between employees or executives, especially when one of the individuals is not reporting to the other.

Interestingly, many experts believe there should be an explicit ban, especially considering the fact that office romance is so common. According to a recent survey conducted by Vault, a career management and humans resources website, 58 percent of employees say they have been involved in an office romance, up from 46 percent in Vault's survey two years ago.

However, more than 8 of 10 participants in the survey either said they were unaware of any company policy regarding workplace dating (44 percent), or said there is no policy governing office romances (39 percent). Of those who stated that a policy exists, most acknowledged the policy usually banned managers from date subordinates.

HR And Compliance Oversight

Of course, the department most commonly charged with monitoring and enforcing these policies is human resources.

The Stonecipher affair, in fact underscores the convergence between compliance and human resources when it comes to enforcing a company’s code of ethics, dating policies, and whistle-blowing procedures. After all, an anonymous whistleblower outed the relationship to the board and company ethics officials, providing romantic e-mail exchanges as proof, according to reports.

And this employee was simply following corporate policy and procedures that they no doubt found in their employee handbooks distributed by the HR department.

Indeed, last April, Boeing had instituted a policy signed off by Stonecipher requiring all of the aerospace giant’s 160,000 employees to sign whistle-blower agreements that require them to report potential ethical lapses, according to a published report. “Every company has [these kinds of policies],” explains Charles Elson, and “HR plays an important role” enforcing them.

“HR is always involved in the day-to-day governance of a corporation,” explains Brian Clark, partner with Clifton Budd & DeMaria, a New York City-based management, labor and employment law firm. “HR has historically been a repository for corporate governance. When there is illegal or inappropriate conduct, HR should be working with the in-house legal counsel.”

Clark explains that the human resources department has jurisdiction of all employee issues and corporate compliance. The department usually oversees the company’s ethics code, and essentially is in charge of insuring that company employees are aware of and receiving training and made to understand all employment-related laws. At larger companies, that role has migrated to a compliance or legal sub-group, but even in those cases there is often considerable overlap with the HR department.

HR’s operational role at most companies is typically broad; the department is usually involved in everything from handling reorganizations and relocations, to handling harassment charges and love affairs. And that broad role has ensured the department is involved in a variety of operational issues related to governance, compliance and ethics.

Most HR departments, for example, are involved not only in the creation of public business codes, but in internal values statements. A recent ethics study by Booz Allen found that 89 percent of companies studied had a written corporate values statement, and 90 percent of these specify ethical conduct as a principle.

"Ethics-related language in formal statements not only sets corporate expectations for employee behavior—companies are using it as a shield in an increasingly complex and global legal and regulatory environment," said Chris Kelly, vice president at Booz Allen, when the study was released.